Local banks push back against feds' controversial industry overhaul provision

By Steve Daniels
June 07, 2010
Local bankers who thought they'd survived the worst of the meltdown are now fighting a provision in the pending federal financial reform bill that would force them to go out and raise more capital.

If the language in the Senate's version of the financial services industry overhaul survives in the final bill, banks such as Wintrust Financial Corp. that thought their capital was more than sufficient will have to tap investors for hundreds of millions of dollars â or reduce their lending.

Weaker players like ShoreBank Corp., the prominent community bank that recently scrambled to raise at least $140 million in equity from Wall Street's largest banks, may have to find some additional benefactors to remain solvent.

A conference committee of House and Senate members is preparing to work out differences between the chambers' versions, with a July 4 goal of sending the bill to the president. If the provision is included, bankers say it will be a body blow to a local industry that just now is beginning to recover from the recession.

The provision 'ranks up there with the dumbest things I've ever seen.'

â Edward Wehmer,
CEO, Wintrust
The language, authored by U.S. Sen. Susan Collins, R-Maine, and supported by Federal Deposit Insurance Corp. Chairman Sheila Bair, takes aim at a type of investment in banks called trust-preferred securities. This tax-advantaged hybrid of debt and equity is prized by banks because it's cheaper for them than common equity and is treated as prime capital by regulators. But under the Senate bill, trust-preferred securities no longer would count as "Tier 1" capital, leaving banks to scramble to replace it with common equity.

In drafting the controversial provision, Ms. Collins, objecting to more liberal capital rules for bank holding companies than for the underlying banks themselves, wants holding companies to be subject to tougher requirements.

At the six largest publicly traded banks in the Chicago area, trust-preferred securities accounted for $885 million, or 17%, of Tier 1 capital as of March 31. With banks able to make loans at up to 10 times their capital, the disqualification of those securities would reduce their collective lending capacity by up to $8.8 billion.

The provision "just ranks up there with the dumbest things I've ever seen," says Edward Wehmer, CEO of Lake Forest-based Wintrust, one of Chicago's largest locally based banks, with $12.8 billion in assets and $250 million in trust-preferred securities. If it's approved, "we'd slow down. We'd slow our growth down."

The Illinois Bankers Assn. is making removal or softening of Ms. Collins' amendment its top priority and is asking U.S. Rep. Luis Gutierrez, D-Ill., who is expected to be on the conference committee, to target it.

"What's at stake is our ability to serve our customers in our communities," says Linda Koch, president and CEO of the Springfield-based association.

A spokesman for Mr. Gutierrez said he was out of the country last week and unable to comment.

If lawmakers can be persuaded to tweak the bill, many bankers believe the options include grandfathering in existing trust-preferred securities or giving banks a few years to attract new capital to replace them.

Of Rosemont-based Taylor Capital's $317 million in high-quality capital as of March 31, $87 million, or 27%, was trust-preferred securities.

While the impact on healthy banks would be harmful, it could be fatal to banks closer to the brink. ShoreBank, which just secured a $140-million infusion of equity from Goldman Sachs Group Inc. and other big Wall Street players to stave off failure, had $34 million in trust-preferred securities on its books as of March 31. Having tapped virtually all of the largest U.S. banks for capital, ShoreBank would be hard-pressed to collect tens of millions more.

A ShoreBank spokesman declines to comment.

Other items in the financial-services bill worry local bankers, too. They include an amendment by Sen. Ricard Durbin, D-Ill., to cut fees banks charge merchants when bank customers use debit cards. Mr. Durbin applied the limit to larger banks only, but the smaller banks believe merchants won't accept a two-tiered pricing system.

Another provision would cut the higher loan limits enjoyed by state-chartered banks to the lower limits applied to federally chartered banks. Illinois has more state-chartered banks â 409 of the 542 locally based lenders have state charters â than any other state, according to the Illinois Bankers Assn.

But the trust-preferred issue looms largest, says Daniel McKay, partner at Chicago law firm Vedder Price P.C. The securities "serve as a significant capital source for the banks right now," he says. "This is a time when capital is very difficult to find."

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